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Strategies & Market Trends : Electronic Contract Manufacture (ECM) Sector -- Ignore unavailable to you. Want to Upgrade?

To: kolo55 who wrote (962)	12/12/1997 9:07:00 PM
From: DD™	Respond to of 2542

Taken from Motley Fool Evening News.. FOOL ON THE HILL An Investment Opinion by Randy Befumo Electronics Manufacturers Short Circuit "Kent Electronics (NYSE: KNT) (N) (S) warning last night that its fourth quarter revenues would be light because of weakness in its contract manufacturing operations did not sit well with investors today. All manner of electronic contract manufacturers and printed circuit board fabricators got smashed today over this bit of news. The growing worries over the economic stability of East Asia and how this might affect customers has only served to exacerbate long-standing fears that there may be too much capacity in this fast-growing industry. Kent Electronics issued a press release last night after the stock went into virtual free fall yesterday, tumbling $6 1/2 to $22 on a Merrill Lynch downgrade. Although Kent said it would make EPS estimates of $0.36 in the third quarter, the company warned that fourth quarter revenues would only be in the range of $180 to $190 million because of "lower than anticipated contract manufacturing revenues." Kent said that its K*TEC contract manufacturing unit had "a slower ramp-up of new customers and of new customer orders." Although Kent's comments could be construed to reflect difficulties with the management of internal operations and not slow growth in the electronic contract manufacturing (ECM) group, Wall Street choose to take the more pessimistic mindset and continued to dump any company related to ECM. Solectron (NYSE: SLR) (N) (S) fell $2 7/8 to $30, SCI Systems (Nasdaq: SCI) (N) (S) was off $2 7/8 to $39 11/16, Jabil Circuits (Nasdaq: JBIL) (N) (S) dove $5 5/16 to $37 13/16, DII Group (NYSE: DIIG) (N) (S) slipped $1 5/16 to $22, and Flextronics (Nasdaq: FLEXF) (N) (S) was doused for $1 to $32 1/2. Printed circuit board fabricators, some of whom also provide ECM services, also dropped today, including Sanmina (Nasdaq: SANM) (N) (S), off $3 5/8 to $57 7/16, and Hadco (Nasdaq: HDCO) (N) (S), down $4 3/8 to $47 1/4. Investors are worried about these companies because their customers are really getting beaten up. Consider recent initial public offering International Manufacturing Services (Nasdaq: IMSX) (N) (S) was only lightly touched for $5/16 to $7 3/16. The company's two largest customers are Maxtor, in the very choppy drive business, and Bay Networks (NYSE: BAY) (N) (S), which just warned this week that quarterly revenues would not meet expectations. These two companies combined account for more than 80% of International Manufacturing's trailing revenues. No wonder the shares trade well below the company's $11 1/2 offering price at the end of October. Given that ECM revenues are highly dependent on sales of the actual electronic equipment, any disappointments among major customers could easily become a problem for any company that provides manufacturing services or components. The slowdown in business could also lead to margin erosion and price competition as it would create excess capacity in an industry that has been maxxed out for years. Although investors with a perspective of three to five years might not be concerned, this does create substantial near-term earnings risk for all of these companies. This earnings risk is being recognized by the market in the form of an increased "discount rate" at which the future cash flows are being valued, causing the share prices to decline. The sudden, sharp compression in valuations for the contract manufacturers has created a decent real buying opportunity in the group. Of the 14 companies in the Fool Pure Contract Manufacturing Universe, the average price/sales ratio (PSR) right now stands at 0.80, the lowest level in months. Including the four printed circuit board fabricators only bumps the average price/sales ratio up to 1.02. Although not dirt cheap by a long shot, within the group there are some relatively interesting companies. By focusing on companies with better-than-average operating margins (above 6.5%) and high returns on equity and invested capital with medium to low valuations, an investor could find a nice year-end bargain in the coming weeks. The recently published Industry Focus listed Plexus (Nasdaq: PLXS) (N) (S) as the "Idea" for the coming year in the ECM universe. The recent drop in Plexus combined with the fact that the company's product portfolio is mostly consumer electronics and not computer technology makes it even more interesting at 0.97 times sales with a 28.4% return on equity over the past year. Kimball International (Nasdaq: KBALB) (N) (S) may be rich relative to earnings, but the stunningly low PSR of 0.43 and the 3% dividend yield give an added punch. Many of these companies would be even more attractive if concentrated panic selling continues to weigh on the shares. "

To: kolo55 who wrote (962)	12/13/1997 1:15:00 PM
From: rich evans	Read Replies (2) \| Respond to of 2542

I would agree that its a great buying opportunity. My problem is that I was fully invested and don't think its prudent to increase my margin so I had to sell to buy and sold some chemical and diode companies. Jabil should report well. Patroller on the JBIL thread posted a telephone call with JBIL IR which confirmed that JBIL doesn't make the products with inventory problems and should do well in 98 with Quantums tape storage. Wish I had kept some reserves.But who would have guessed?Maybe JBIL options are a good play? Rich

To: kolo55 who wrote (962)	12/15/1997 1:10:00 PM
From: 18acastra	Read Replies (2) \| Respond to of 2542

Another tidbit about what is happening with Jabil & Sanmina: Cisco getting whacked over inventory build concerns. Apparently Cisco 10-Q release last week showed pretty strong sequential inventory build. Spooked some people. Sanmina and Jabil, who have big hunks of business w/ Cisco are selling off in response to the news. My guess is the concern is misguided, but don't follow Cisco so don't know if inventory build is a big deal or not. Have a hard time believing the inventory build wouldn't be purposeful. Cisco has strong track record & has historically done a good job matching inventory with customer needs. I was also under impression that Jabil volume was build to ship not build to stock. My opinion.